Retirement Plans for Freelancers and Small Businesses

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Disclaimer: I’m not an expert in retirement planning, taxes, accounting. This article is written based on my personal opinion, diligent research and years of experience. There is NO AFFILIATE LINKS in this article.

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According to Bloomberg, half of older Americans have nothing in retirement savings.

“The bad news is that almost half of Americans approaching retirement have nothing saved in a 401(k) or other individual account. The good news is that the new estimate, from the U.S. Government Accountability Office, is slightly better than a few years earlier.

Of those 55 and older, 48 percent had nothing put away in a 401(k)-style defined contribution plan or an individual retirement account, according to a GAO estimate for 2016 that was released Tuesday. That’s an improvement from the 52 percent without retirement money in 2013.

Two in five of such households did have access to a traditional pension, also known as a defined benefit plan. However, 29 percent of older Americans had neither a pension nor any assets in a 401(k) or IRA account.”

Retirement plans isn’t a popular subject in the US, therefore more reasons to start thinking and taking actions when you start freelancing!

When I find myself in the general how to freelance discussions, retirement savings isn’t one of the first questions people ask, but it’s actually more important than they think. Two things to know and to keep in mind before we start:

  1. Retirement plans are available and easy to sign up and manage for freelancers and small business owners. You can do it today with $0 in the account.

  2. By starting a retirement plan, you’ll reduce your taxes not by a little, but often significantly. It works almost the same way as when you had a full-time job when your employer contributed to your 401(k) automatically by taking a portion out of your paycheck each month. [Examples below]

Why You Should Consider a Retirement Plan as a Freelancer

Tips: For freelancers and small business owners, making contributions to your 401(k) is easy. You have the options to contribute regularly and automatically, or write a single check or two towards end of the year.

Learning from US News, if you swap the word “worker” with “freelancer or small business owner” and you’ll see the same concept with a different lens.

You can defer paying income tax on the money you deposit in a traditional 401(k) plan until the money is withdrawn from the account. A worker in the 24 percent tax bracket who contributes $10,000 to a 401(k) plan will reduce his tax bill by $2,400. However, workers can contribute as much as $18,500 to a 401(k) plan in 2018. If that same worker boosted his contribution to max out his 401(k) plan he could save $4,440 at tax time.

Workers age 50 and older are eligible to make catch up contributions to 401(k) plans of up to an additional $6,000. A 55-year-old employee in the 24 percent tax bracket who maxes out her 401(k) by contributing $24,500 will save $5,880 on taxes.

Your exact tax savings will depend on your tax bracket. Those who are in higher tax brackets have the most to gain by maxing out their 401(k) plan. An older worker in the 37 percent tax bracket who contributes $24,500 to a 401(k) plan could reduce his income tax bill by $9,065. Married couples who are both eligible for a 401(k) plan at work can max out a 401(k) in each of their names for double the tax savings.

Here are the 2019 tax brackets announced by IRS, and published by Forbes:


Hey it’s Fei, I’m so glad you found me!

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I created Feisworld Podcast in 2014 to help independent creators live their creative and financial freedom. We have over 200 episodes and listeners from 50+ countries. Yeah!

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There’s such a thing called “Self employment taxes”. To estimate what it means to you, what’s involved, try this convenient calculator:

How to Choose a Retirement Plan as a Freelancer/Small Business Owner

NerdWallet breaks down all five options which is way more than you need.

1. Traditional or Roth IRA

Best for: Those just starting out, or saving less than $6,000 a year. If you’re leaving a job to start a business, you can also roll your old 401(k) into an IRA.

2. Solo 401(k)

Best for: A business owner or self-employed person with no employees (except a spouse, if applicable).


Best for: Self-employed people or small-business owners with no or few employees.


Best for: Larger businesses, with up to 100 employees.

5. Defined benefit plan

Best for: A self-employed person with no employees who has a high income and wants to save a lot for retirement on an ongoing basis.

To speak with a specialist and open an account, contact Vanguard: (Vanguard has no affiliation with Feisworld LLC. I have been using Vanguard for retirement planning. It’s a brand I love and trust)

Solo 401(k), also known as Individual 401(k) works for most freelancers with no employee

Feisworld uses Solo 401(k), also known as Individual 401(k) at Vanguard.

Here’s some more information on contribution limit and tax advantage from the Vanguard Individual 401K webpage as of August 2019. Please visit Individual 401(k) at Vanguard for latest information.

Who can participate

Self-employed individuals and business owners with no common-law employees and their spouses who are employed by the business. The business owner can contribute both as an employer and employee. Also C corporations, S corporations, and limited liability companies (LLCs).

Employer contribution limits

  • Up to 25% of compensation* not to exceed $55,000 for the 2018 tax year and $56,000 for the 2019 tax year.

  • Contributions are generally deductible as a business expense and aren't required every year. When contributions are made, however, all participants must receive the same percentage.

Additional notes from Feisworld:

— The reporting of your business income must be gross, meaning you need to complete a full Schedule C showing gross revenue or sales along with all the expense by category

—We suggest checking with your 401K plan administrator before contributing to the plan (i.e. before you send the check!)

Employee contribution limits

  • Employees may defer 100% of their compensation up to $18,500 for the 2018 tax year ($24,500 for employees age 50 or older) and $19,000 for the 2019 tax year ($25,000 for employees age 50 or older).

  • Employee contributions can be either pre-tax or after tax (Roth).

Total contributions

As a business owner, you can contribute both as an employer and employee. The combined amount of employer plus employee contributions can't exceed $55,000 for the 2018 tax year ($61,000 if you're age 50 or older) and $56,000 for the 2019 tax year ($62,000 if age 50 or older).

Additional information from IRS re: Contribution limits for self-employed individuals

You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

  • one-half of your self-employment tax, and

  • contributions for yourself.

Use the rate table or worksheets in Chapter 5 of IRS Publication 560, “Retirement Plans for Small Business,” for figuring your allowable-contribution rate and tax deduction for your 401(k) plan contributions. See also Calculating Your Own Retirement Plan Contribution.

In plain English, the calculation is:

Multiplying 20% (see worksheet attached) times your NET Schedule C income minus 50% of your self-employment tax (the amount shown on line #27 of page #1 of Form 1040). The amount is then ADDED to any contribution you already made if any (i.e. the limit for employee contribution before employee contribution in 2018 was 18K) put in and is then deducted on line #28 of page #1 of Form 1040.

Download this worksheet (Microsoft Word) - be patient, it works! :)

I know I’m saying this calculation 3 different ways because it was so confusing for me at first! The calculation isn’t difficult BUT if you only need to do it once a year, it becomes more challenging to recall these details.

Investment choices

More than 100 Vanguard mutual funds, including 38 index funds with Admiral™ Shares. There's no minimum initial investment.

Browse Vanguard's fund choices


No age, income, or other restrictions.

Vanguard plan features

Roth (after-tax) contributions are allowed.

Account service fees

We charge $20 a year for each Vanguard fund held in a Vanguard Individual 401(k) account. The fee may be waived in certain circumstances.

Account setup & maintenance

  • There's no fee to establish an account.

  • For one-participant plans, annual filing of Form 5500 is required once the plan's assets reach $250,000 or you terminate the plan. We'll provide you with information each year to help you complete the form.

  • Plan administration may require occasional duties, such as periodically updating or restating the plan.

Withdrawals & loans

  • You can't take withdrawals until a specified event, such as reaching age 59½, termination of the plan, separation from service, or other event as identified in the plan.

  • You may be allowed to take a hardship withdrawal, which may be subject to a 10% penalty if you're under age 59½.

  • You may not take a loan from your Vanguard Individual 401(k).